31
      P    l   e   a   s   e   n   o    t   e    t    h   a    t    t    h   e   v    i   e   w   s   e   x   p   r   e   s   s   e    d    h   e   r   e    i   n   a   r   e    t    h   o   s   e   o    f    t    h   e   a   u    t    h   o   r   s   o   n    l   y   a   n    d   s    h   o   u    l    d   n   o    t    b   e    t   a    k   e   n   a   s   r   e   p   r   e   s   e   n    t   a    t    i   v   e   o    f    t    h   e    i   r   e   m   p    l   o   y   e   r   s   o   r   o    f   a   n   y   o    t    h   e   r   p   e   r   s   o   n M&A in Uncer tai n Times: Is Ther e Still  V alue in Growing? * by Stefano Gatti and Carlo Chiarella CAREFIN, Università Bocconi. with a foreword by Massimo Della Ragione, Goldman Sachs International CAREFIN Centre for Applied Research in Finance    U   n    i   v   e   r   s    i    t    à    C   o   m   m   e   r   c    i   a    l   e    L   u    i   g    i    B   o   c   c   o   n    i In collaboration with

Bocconi Report

Embed Size (px)

Citation preview

Page 1: Bocconi Report

8/13/2019 Bocconi Report

http://slidepdf.com/reader/full/bocconi-report 1/30

* P l e a s e n o

t e t h a

t t h e v i e w s e x p r e s s e

d h e r e

i n a r e

t h o s e o

f t h e a u

t h o r s o n l y

a n

d s h o u

l d n o

t b e

t a k e n a s r e p r e s e n

t a t i v e o

f t h e

i r e m p

l o y e r s o r o

f a n y o t h e r p e r s o n

M&A in UncertainTimes: Is There Still

Value in Growing?*by Stefano Gatti and Carlo ChiarellaCAREFIN, Università Bocconi.with a foreword by Massimo Della Ragione ,Goldman Sachs International

CAREFINCentre for Applied Research in Finance

U n

i v e r s i t à

C o m m e r c

i a l e

L u

i g i B o c c o n

i

In collaboration with

Page 2: Bocconi Report

8/13/2019 Bocconi Report

http://slidepdf.com/reader/full/bocconi-report 2/30

Mergers and acquisitions represent an integral part of a company’s corporate life and growth strategy. Through M&A, companies can access new areas of activity, expand their operations in attractive products and geographies, extract synergies and divest non-

strategic businesses, all contributing to value creation for the benefit of all stakeholders.M&A is a permanent part of the corporate landscape and approximately 15% of the cash

generated in the past 10 years by S&P 500 companies was used for external growth. Additionally, M&A volumes have totalled 6.5% of global market capitalisation on averageover the past 30 years.

However, deal making has always been cyclical and, despite this long-term growth trend, global M&A volumes in 2012 have almost halved vs. the 2007 peak. This is due in part to a weak macro environment negatively impacting CEO’s confidence and risk appetite, as

well as to increased scrutiny by shareholders and regulatory bodies on announced trans- actions. Nonetheless, there are positive signs, and the current environment has highlight-ed a number of factors which have the potential to act as catalysts for increased M&A

activity. Cost of capital for example is at historically low levels, and corporate cash bal- ances are at record highs, driven by low interest rates and the limited use of excess cashfor external growth.

We have seen a gradual slow down of these macroeconomic headwinds and companies appear poised to take advantage of attractive valuation levels and limited opportunities for organic growth. Finally, there has been an unprecedented amount of capital raised by

activist shareholders, leading to increased shareholder participation and dialogue withcompany executives, often a driver of renewed activity in this space.

However, despite their importance and relevance in understanding M&A trends, the con-vergence of these positive factors alone is not sufficient to prove if there is value in doingM&A in these uncertain times. The thought-provoking analysis conducted by Stefano Gatti

and Carlo Chiarella shows that external growth can represent a successful and value- accreting strategic move during periods of high volatility, in particular for those who, build- ing on a strong and stable core business and ample f inancial capacity, have been disci- plined in completing transactions with a clear strategic rationale.

A limited number of active buyers on the marketplace means that, provided that high stan-dards of deal execution and due diligence are met, together with the ability to develop a

repeatable acquisition model, and careful planning of merger integration, buyers have theopportunity to acquire businesses during turbulent times at favourable terms without com-

promising the company’s financial stability, thus showing that deals undertaken in periodsof high volatility deliver on average, a higher return.

We have seen this demonstrated with favourable stock market reactions to recent M&Atransactions. Contrary to conventional wisdom (and historical reality), we have seen the

share price of acquirors increasing in the wake of announcing large M&A in recent trans- actions. This highlights the strong support of equity investors to well conceived and smart- ly executed M&A as a strategy to complement corporate activity.

Goldman Sachs is delighted to co-host this important workshop with Bocconi University, aimed at bringing together corporates and investors and sharing the experience of top managers and consultants in the field of Mergers and Acquisitions.

Prefaceby Massimo Della RagioneGoldman Sachs International

Page 3: Bocconi Report

8/13/2019 Bocconi Report

http://slidepdf.com/reader/full/bocconi-report 3/30

Stefano Gatti is Program Director of the Bachelor of Economics and Finance atUniversità Bocconi, where he has also served as Director of the International

Teachers Program. His main area of research is corporate finance and investmentbanking. He has written numerous articles in these areas including recent publica-tions in Financial Management, The Journal of Money, Credit and Banking, TheJournal of Banking and Finance, The Journal of Applied Corporate Finance and theEuropean Journal of Operational Research. Professor Gatti has published a vari-ety of texts on banking and finance and has acted as a consultant to several finan-cial and non-financial institutions as well as the Italian Ministry of the Economy. Heis financial advisor for the Pension Fund of Italian Health Care professionals andsits on the Board of Directors and board of auditors of Italian industrial and finan-cial corporations.

Carlo Chiarella is a PhD Candidate in Finance at Università Bocconi and VisitingScholar at NYU Stern School of Business. His main area of research is corporatefinance. In the field of Mergers and Acquisitions, he has studied bid premium andmethods of payment negotiations by asymmetrically informed counterparties. Inrecent research, he studied the role of capital markets and models of corporatecontrol in the promotion of corporate innovation.

Contributing Authors

Page 4: Bocconi Report

8/13/2019 Bocconi Report

http://slidepdf.com/reader/full/bocconi-report 4/30

• Introduction

• Value Creation Through M&A: How does value creation changein uncertain periods?

• Volatility and M&A Deals in Europe Between 2001 and 2012:Some surprising lessons from turbulent market environments

• Looking Ahead

Contents

Page 5: Bocconi Report

8/13/2019 Bocconi Report

http://slidepdf.com/reader/full/bocconi-report 5/30

Page 6: Bocconi Report

8/13/2019 Bocconi Report

http://slidepdf.com/reader/full/bocconi-report 6/30

It is easy to notice the inverse relation between the volume of completed deals andthe level of VIX. Data looked at confirms the accepted wisdom that: higher eco-nomic uncertainty is not the ideal environment in which to consummate an M&A transaction.

While the first period of severe turmoil (October 2008 – July 2009) originated in theUS and was unleashed by the demise of Lehman Brothers, the second (October2011 – July 2012) was mainly driven by the Eurozone sovereign debt crisis.Indeed, the different causes of turmoil can be perceived more clearly by disentan-gling the global volume of completed M&A deals by region (see Figure 2 ).

In Figure 2 , we have allocated each deal based on the nationality of the biddercompany. The chart shows a sizeable drop in the volume of completed deals inall the three continents in the first turmoil period Q4 2008-Q2 2009. However,while the US, Asia and Japan seem to reabsorb the shock quite rapidly, Europeis lagging behind. In fact, at the end of the period, the continent shows a far lowerlevel of completed deals compared to the volumes during Q3 2007. Although inQ3 2007, Europe accounted for a remarkable 42% of the total volume of com-pleted deals, this percentage dropped by half at the end of 2012. Conversely, theUS has consistently rebounded after the lowest peak (23%) of Q1 2008 (seeFigure 3 ).

2013 M&A in Uncertain Times: Is There Still Value in Growing?

5

FIGURE 2 Value of completedM&A deals (bn US$)Q3 2007-Q4 2012

Source: Thomson Reuters

0

100

200

300

400

T o

t a l D e a

l V a

l u e

( b n . U

S $ )

Q 3 2 0 0

7

Q 4 2 0 0

7

Q 1 2 0 0

8

Q 2 2 0 0

8

Q 3 2 0 0

8

Q 4 2 0 0

8

Q 1 2 0 0

9

Q 2 2 0 0

9

Q 3 2 0 0

9

Q 4 2 0 0

9

Q 1 2 0 1

0

Q 2 2 0 1

0

Q 3 2 0 1

0

Q 4 2 0 1

0

Q 1 2 0 1

1

Q 2 2 0 1

1

Q 3 2 0 1

1

Q 4 2 0 1

1

Q 1 2 0 1

2

Q 2 2 0 1

2

Q 3 2 1 0

2

Q 4 2 0 1

2

US Europe Asia + Japan

Page 7: Bocconi Report

8/13/2019 Bocconi Report

http://slidepdf.com/reader/full/bocconi-report 7/30

The reasons for different performances in the M&A markets in the US and Asiacompared to Europe are manifold. However, three aspects seem very clear:

1 The cost of funding is at record lows and is benefiting from expansive mone-

tary policy by the Federal Reserve.2 Lower cost of funding helps the Private Equity market rebound. Fundraising vol-umes in the US and Asia/Japan have returned to 2005 levels after bottomingout in 2009-2010, while Europe is showing a slower recovery (see Figure 4 ). Onthe other hand, Private Equity vehicles have lengthened the holding period inresponse to more difficult markets for divestitures and lower exit valuation mul-tiples.2

3 Lower cost of funding and the higher propensity of Private Equity vehicles toexit via trade sales are also pushing the best industrial buyers (those whoemerged from the first turmoil of 2008-2009 with lower leverage and soundbusiness models) to pursue an international growth strategy. These buyers arein search of good bargains in markets that are recovering at a slower pace. TheHogan Lovell Survey indicates that one-third of the interviewed companies in

Asia and the US say they sense rising pressure from activist shareholders toinvest their cash piles.

6

2013 M&A in Uncertain Times: Is There Still Value in Growing?

2 Citi (2013), 2013 Corporate Finance Priorities, Citi GPS Global Perspectives & Solutions, January.

Source: Thomson Reuters

3 9 %

4 2 %

1 9 %

3 2 %

4 8 %

2 0 %

2 3 %

5 2 %

2 5 %

4 0 %

3 7 %

2 3 %

3 0 %

5 7 %

1 3 %

2 5 %

5 7 %

1 8 %

4 8 %

3 7 %

1 5 %

5 9 %

2 4 %

1 7 %

4 6 %

2 4 %

3 0 %

5 3 %

2 7 %

2 0 %

4 1 %

2 9 %

3 0 %

4 2 %

3 6 %

2 2 %

3 8 %

3 5 %

2

7 %

3 6 %

3 3 %

3 1 %

5 2 %

2 9 %

1 9 %

4 7 %

3 0 %

2 3 %

4 2 %

3 2 %

2 6 %

4 3 %

3 1 %

2 6 %

3 8 %

3 4 %

2 8 %

4 7 %

3 1 %

2 2 %

4 9 %

2 4 %

2 7 %

6 0 %

2 1 %

1 9 %

0

20

40

60

80

100

% o

f T o

t a l D e a

l V a

l u e

D o

l l a r V o

l u m e

Q 3 2 0 0 7

Q 4 2 0 0 7

Q 1 2 0 0 8

Q 2 2 0 0 8

Q 3 2 0 0 8

Q 4 2 0 0 8

Q 1 2 0 0 9

Q 2 2 0 0 9

Q 3 2 0 0 9

Q 4 2 0 0 9

Q 1 2 0 1 0

Q 2 2 0 1 0

Q 3 2 0 1 0

Q 4 2 0 1 0

Q 1 2 0 1 1

Q 2 2 0 1 1

Q 3 2 0 1 1

Q 4 2 0 1 1

Q 1 2 0 1 2

Q 2 2 0 1 2

Q 3 2 0 1 2

Q 4 2 0 1 2

United States Europe Asia and Japan

FIGURE 3Percentage breakdown

by regionQ3 2007-Q4 2012

Page 8: Bocconi Report

8/13/2019 Bocconi Report

http://slidepdf.com/reader/full/bocconi-report 8/30

Incidentally, lower leveraged buyers can also exploit higher debt, given the favor-able level of interest rates, without running the risk of a negative impact on ratings. 3

Compared to the US and Asia, the European situation shows lower levels of con-

fidence and a consequently depressing effect on the M&A market. The apparent contradiction is that company fundamentals look good. After the col-lapse of Lehman Brothers, the best European corporations have massively de-lev-ered their balance sheets, accumulating considerable levels of cash. At the end of 2012, Société Générale Cross Asset Research estimated that EuropeanCorporations are sitting on about 1 trillion euros in cash and short-term invest-ments corresponding to slightly more than 9% of their total assets. 4 The ratiobetween financial debt and total assets has dropped from a 70% peak in 2008 toa well-balanced 50% at the end of 2012.

However, today corporations are forced to keep cash on hand for precautionaryreasons rather than using it for capital expenditures over the next few years. 5 Thisis a reaction to bad macroeconomic performance in Europe coupled with anurgent need for cash due to the wall of corporate and sovereign refinancing andfear of future liquidity constraints.

2013 M&A in Uncertain Times: Is There Still Value in Growing?

7

FIGURE 4Private equity fundraisingby region 2003-2012

(bn US$)

0

100

200

300

400

A m o u n

t R a

i s e

d ( b n .

U S $ )

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

US Europe Asia + Japan

3 Standard and Poor’s (2013), Another Active Year for M&A in U.S. Consumer Packaged Foods, Beverages, And Durables,

RatingsDirect, February.4

Société Générale Cross Asset Research (2013), Outlook 2013 European Credit – Still Occupying the Sweet Spot, January.5 Standard & Poor’s (2013), Cash, Caution, And Capex - Why a Trillion Euro Cash Pile Is Unlikely to Drive a European

Capex Boom, Ratings Direct, February.

Source: Thomson Reuters

Page 9: Bocconi Report

8/13/2019 Bocconi Report

http://slidepdf.com/reader/full/bocconi-report 9/30

8

2013 M&A in Uncertain Times: Is There Still Value in Growing?

0

10

20

30

40

50

60

70

80

90

100

T o

t a l A m o u n

t ( b n .

e u r o

)

2012 2013 2014 2015 2016 2017 2018 2019

As of December 2008 As of August 2011

Source: SG Global Research

2 0 1 2

2 0 1 3

2 0 1 2

2 0 1 3

2 0 1 2

2 0 1 3

2 0 1 2

2 0 1 3

2 0 1 2

2 0 1 3

2 0 1 2

2 0 1 3

2 0 1 2

2 0 1 3

2 0 1 2

2 0 1 3

0

20

40

60

80

100

120

140

160

180

200

T o

t a l G r o s s

F u n

d i n g

( b n .

e u r o

)

Germany Italy France Spain Netherl. Belgium Austria FinlandIssuancein progressin 2013

15% 19% 14% 25% 16% 24% 10% 7%

Source: Probitas Partners

FIGURE 5Gross funding in some

Eurozone countries

in 2012-2013 (bn euro)

FIGURE 6Scheduled European debt

maturities by yearfor sub-investment

grade issuers (bn euro)2012-2019

Page 10: Bocconi Report

8/13/2019 Bocconi Report

http://slidepdf.com/reader/full/bocconi-report 10/30

Page 11: Bocconi Report

8/13/2019 Bocconi Report

http://slidepdf.com/reader/full/bocconi-report 11/30

Firms engage in M&A for a number of reasons that have been studied and docu-mented in existing empirical literature. External growth, consolidation of marketshare, vertical integration, diversification of risk, but also less rational motivationslike imitative behavior, empire building or managerial hubris have been cited as themost frequent reasons behind the conclusion of a deal.

While the underlying motivations typically mark the success or failure of the deal,undoubtedly the available evidence of successful cases indicates that a well-pre-

pared acquisition strategy, together with a disciplined execution and post integra-tion phase enhance the probability of generating value for shareholders. In addi-tion, if the bidder is able to replicate the acquisition strategy in a consecutivesequence of deals, the probability of extracting value is even higher ( Figure 7 ).9

10

2013 M&A in Uncertain Times: Is There Still Value in Growing?

Value Creation Through M&A :

How does value creation changein uncertain periods?

FIGURE 7The M&A processand key variables

for successful transactions

9 Harding, D.; Shankar, S. and Richard Jackson (2013), The Renaissance in Mergers and Acquisitions: The surprising

lessons of the 2000s, Bain and Co. Internal Report.

1 CLEAR M&A STRATEGY

4 POST INTEGRATION PHASE 2 WELL EXECUTED PREPARATORYPHASE/DUE DILIGENCE

3 DISCIPLINED DEALEXECUTION/NEGOTIATION

• Definition of the best method of payment and• Impact on the bidder’s financial situation• Definition of the premium to be paid

• Process/Procedure integration• Cultural harmonization• Identification of managerial needs and skills

• Careful and precise due diligence• Assessment of potential risk of the deal

• Assessment of target strategic fit• Assessment of benefits from the deal• Precise valuation of expected synergies

• Track record• Lessons learned

from past acquisitions

Page 12: Bocconi Report

8/13/2019 Bocconi Report

http://slidepdf.com/reader/full/bocconi-report 12/30

Academic literature has identified different ways to judge whether a deal creates ordestroys value. Suggested methodologies include the analysis of accountingmeasures of profitability and the soundness of cash flow generation. In addition,scholars examine the short-term effects on the price of the bidder and target stock when the deal is announced, or the long-term over- or underperformance of thestocks of the companies involved in the deal compared to a market index.

However, from a managerial point of view, the true measure of a successful M&A deal is the ability of the bidder to pay a lower premium than the expected syner-gies that can be captured from the transaction. In this case, market reaction to thedeal announcement is very likely to be positive and, in the long run, the stock per-formance should be better than the one of the stock market index. 10

Provided that the difference between synergies and the premium is positive, therisk for the bidder in obtaining the expected positive difference is the second ele-

ment that determines the definitive success of the deal. This risk is determined, inthe first instance, by the ability of the bidder to master the acquisition process (interms of timing 11 and the preparatory phase, due diligence, negotiation and thepost closing integration phase) and by two deal-specific variables:

1 the selected method of payment;2 the relative size of the target compared to the size of the bidder.

The method of payment (cash, bidder’s stock or a combination of the two) is cru-cial since it can send contrasting signals to the market. Empirical evidence unani-mously recognizes that the announcement of a stock deal is systematicallyaccompanied by negative abnormal returns for the bidder company on the

announcement day, due to the overvaluation signal conveyed to the market.12

Onthe other hand, a cash payment is frequently appreciated by the market on theimplicit assumption that only very sound bidders have the financial strength toafford it. Moreover, only very confident managers will use cash in the deal in orderto capture all the benefits of a positive difference between expected synergies andthe premium paid to the target shareholders. Indeed, when a bidder pays cash,the only shareholders who will gain from the difference between synergies and pre-miums are the bidder’s.

The relative size is the second factor that determines the risk of the deal. It is intu-itive that the larger the size, given a certain percentage premium paid by the bid-der on the target’s stand-alone value, the bigger the bet the bidder’s managementis making in case the expected synergies do not emerge in the post integrationphase.

2013 M&A in Uncertain Times: Is There Still Value in Growing?

11

10 Mauboussin, M.J. (2010), Surge in the Urge to Merge: M&A Trends and Analysis, Journal of Applied Corporate Finance,

vol.22, n.2.11

McNamara, G.; Haleblian, J. and Bernadine Johnson Dykes, (2008), The Performance Implications of Participatingin an Acquisition Wave, Academy of Management Journal, Vol. 51, No. 1.

12 Bruner, R.F. (2002). Does M&A Pay? A Survey of Evidence for the Decision Maker, Journal of Applied Finance, vol. 12, n.1.

Page 13: Bocconi Report

8/13/2019 Bocconi Report

http://slidepdf.com/reader/full/bocconi-report 13/30

Notwithstanding the fact that available literature has extensively analyzed risk andreturn for M&A deals, much less is known about how return and risk change in tur-bulent times. No doubt that when market conditions become less predictable, eventhe most successful bidders face greater difficulties in extracting value from deals:

1 First, past experience in successful deals is not always replicable in new trans-actions, given the changed, more uncertain context compared with the past.Past success or a consistent track record on past acquisitions does not nec-essarily lead to future success.

2 Second, in turbulent times, it is more difficult for a buyer to assess the fair valueof the target, the expected value of the synergies and consequently to set arational level of premium. All this is due to increased uncertainty about the futureexpected value of the target’s cash flows and performance.

3 Third, a changed, less defined business environment can make it more difficultfor the buyer to carry out post integration steps as originally planned.

If these factors seem to de-incentivize buyers from carrying out acquisitions inhighly volatile periods, there are also good reasons to assert the contrary. In fact,crisis and volatility also create opportunities. 13

The first reason is that in periods of higher uncertainty and volatility, only the bestbuyers can afford to pursue external growth strategies:

1 Best buyers can use cash if they want to do so because they are financiallysound, and have low leverage and cash resources or unexploited credit linesreadily available for acquisitions.

2 Best buyers are also in the best position to choose to pay in stock, because

they can more easily convince sellers to accept a more opaque method of pay-ment and save liquid resources for further expansion. 14

The second reason that explains better opportunities is that best buyers wieldhigher bargaining power toward the sellers, and are able to extract more value andconclude the deal more rapidly and at relatively low prices. This theory is confirmedby the Hogan Lovell survey, where three out of five surveyed companies saw anopportunity to acquire a business during favorable conditions.

Third, best buyers can choose among sellers. They can shop around more easilyand have the time and resources to select the best target on sale.

Table 1 summarizes the reasons that explain why there may be good motivationsto think that better deals for buyers are consummated in periods of higher volatility.

12

2013 M&A in Uncertain Times: Is There Still Value in Growing?

13

Citi (2012), 20123 Corporate Finance Priorities, Citi GPS Global Perspectives & Solutions, January.14 Chiarella, C. and Gatti, S. (2012), How Much to Pay, and How, for Opacity? Negotiating Premiums and Method

of Payment in M&A, Working Paper, Università Bocconi, December.

Page 14: Bocconi Report

8/13/2019 Bocconi Report

http://slidepdf.com/reader/full/bocconi-report 14/30

2013 M&A in Uncertain Times: Is There Still Value in Growing?

13

Key process steps Threats Opportunities1 Clear M&A Strategy

2 Well-executedpreparatory phaseand due diligence

3 Disciplined executionof the deal/negotiation

4 Post integrationphase

Past track record of successis not necessarily the keyto success for future dealsMore difficult to estimateexpected synergiesMore difficult to assess risk(higher opacity)

Less freedom to imposethe preferred method of paymentMore difficult to set a fairpremium for the deal

More difficult to proceedas originally intended if generalmarket conditions changeunexpectedly

Bargaining power shiftsto the biddersIncreased opportunities to selectamong the best fitting sellers

Selected target likely to bea less risky investment

Best buyers can use cashwhen needed (less financiallyconstrained)Best buyers can more easilyconvince sellers to accept stock payments if sellers are carefully

selected (see point 1)Easier if the target has beencarefully vetted in the previousphases

TABLE 1Opportunities and threatsfor M&A dealsin uncertain times

Page 15: Bocconi Report

8/13/2019 Bocconi Report

http://slidepdf.com/reader/full/bocconi-report 15/30

The European market for M&A offers an interesting setting to observe the keytrends in deal making in tough times. In this section, we provide an empirical analy-sis that covers 1,248 completed transactions. These transactions involve biddersand targets that are both based in Europe and listed on stock exchanges. The time

period we analyze is from January 2001 to December 2012. We collect data onindividual deal characteristics from Thomson One Banker for all completed M&A transactions with disclosed deal value by and for public firms, excluding equitycarve-outs, self-tenders, exchange offers and open market-repurchases. Firmfinancials are retrieved from Thomson Datastream.

Deal value across all observations in our sample is on average $1bn and rangesfrom as little as $10mn to as much as $60bn. In more than half of our observations(638) the acquirer secures in the transaction a controlling stake in the target, whichin most cases corresponds to full ownership (406), occasionally building on a pre-existing foothold (146). Residual observations are transactions for the acquisitionof minority (314) and remaining stakes (296), respectively. The period we consider

comprises three distinct intervals of significant turmoil: from July 2002 to March2003 with the plunge of stock markets due to the Tech Bubble bursting; fromSeptember 2008 to July 2009 as a result of the credit crisis that followed the endof the housing boom in the U.S.; and Lehman’s collapse and between August2011 and 2012 as the crisis hit European sovereign debt. To capture varying mar-ket conditions we track the dynamics of volatility with the historical series of theEuro STOXX 50 Volatility Index (VSTOXX) which reflects market expectations of future volatility derived from real-time option prices for European stocks. From thisperspective, we are able to differentiate transactions concluded in quiet times (948)from those in periods of high volatility (300), namely when the VSTOXX Index liesrespectively below or above the 75th percentile of its historical distribution (i.e.above 30%). A closer inspection of the two subsamples reveals that the relativefrequency of transactions for controlling, remaining and minority stakes is equiva-lent across groups; summary statistics on deal value are also comparable.

14

2013 M&A in Uncertain Times: Is There Still Value in Growing?

Volatility , Market Performance

and M&A Deals in EuropeBetween 2001 and 2012: Somesurprising lessons from turbulentmarket environments

Page 16: Bocconi Report

8/13/2019 Bocconi Report

http://slidepdf.com/reader/full/bocconi-report 16/30

2013 M&A in Uncertain Times: Is There Still Value in Growing?

15

As the first step in our analysis, we explore the link between volatility and M&A activity. In particular, Figure 8 illustrates for each quarter in our sample period theaggregate volume of M&A transactions and the corresponding average level of thevolatility index (VSTOXX). The three periods of market turmoil discussed above are

marked with red labels and reference lines.Peaks in the VSTOXX Index clearly capture the different periods of market turmoil.Consistent with the perception that the pursuit of M&A in volatile markets is risky,we observe a significant drop in deal volumes both in terms of overall transactioncount and value. We assert that this effect is linked more to the challenging con-ditions for deal financing rather than to the lack of lucrative opportunities. In sup-port of this argument Figure 9 shows how changes in volatility reflect on marketsfor equity and corporate debt. The quarterly dynamics of the stock market aretracked by the level of the Euro STOXX 50 Index (ESTOXX). Instead, corporatebond markets for investment grade and high yield issues are captured respective-ly by the estimated percentage annual yield of the IBOXX Euro Corporates 10+Index and the IBOXX Euro High Yield 10+ Index.

FIGURE 8 Volatility, number of dealsand value of completeddeals in Europe 2001-2012

0102030

405060

V S T O X

X I n d e x

0102030

405060

N u m

b e r o

f D e a

l s

Q 4 2 0 0 1

Q 4 2 0 0 2

Q 4 2 0 0 3

Q 4 2 0 0 4

Q 4 2 0 0 5

Q 4 2 0 0 6

Q 4 2 0 0 7

Q 4 2 0 0 8

Q 4 2 0 0 9

Q 4 2 0 1 0

Q 4 2 0 1 1

Q 4 2 0 1 2

Q 1 2 0 0 1

Q 2 2 0 0 1

Q 3 2 0 0 1

Q 1 2 0 0 2

Q 2 2 0 0 2

Q 3 2 0 0 2

Q 1 2 0 0 3

Q 2 2 0 0 3

Q 3 2 0 0 3

Q 1 2 0 0 4

Q 2 2 0 0 4

Q 3 2 0 0 4

Q 1 2 0 0 5

Q 2 2 0 0 5

Q 3 2 0 0 5

Q 1 2 0 0 6

Q 2 2 0 0 6

Q 3 2 0 0 6

Q 1 2 0 0 7

Q 2 2 0 0 7

Q 3 2 0 0 7

Q 1 2 0 0 8

Q 2 2 0 0 8

Q 3 2 0 0 8

Q 1 2 0 0 9

Q 2 2 0 0 9

Q 3 2 0 0 9

Q 1 2 0 1 0

Q 2 2 0 1 0

Q 3 2 0 1 0

Q 1 2 0 1 1

Q 2 2 0 1 1

Q 3 2 0 1 1

Q 1 2 0 1 2

Q 2 2 0 1 2

Q 3 2 0 1 2

Volume Volatility

0204060

80100120140160

V S T O X X I n d e x

0204060

80100120140160

D e a

l V a l u e

( B n .

U S $ )

Q 4 2 0 0 1

Q 4 2 0 0 2

Q 4 2 0 0 3

Q 4 2 0 0 4

Q 4 2 0 0 5

Q 4 2 0 0 6

Q 4 2 0 0 7

Q 4 2 0 0 8

Q 4 2 0 0 9

Q 4 2 0 1 0

Q 4 2 0 1 1

Q 4 2 0 1 2

Q 1 2 0 0 1

Q 2 2 0 0 1

Q 3 2 0 0 1

Q 1 2 0 0 2

Q 2 2 0 0 2

Q 3 2 0 0 2

Q 1 2 0 0 3

Q 2 2 0 0 3

Q 2 2 0 0 3

Q 1 2 0 0 4

Q 2 2 0 0 4

Q 3 2 0 0 4

Q 1 2 0 0 5

Q 2 2 0 0 5

Q 3 2 0 0 5

Q 1 2 0 0 6

Q 2 2 0 0 6

Q 3 2 0 0 6

Q 1 2 0 0 7

Q 2 2 0 0 7

Q 3 2 0 0 7

Q 1 2 0 0 8

Q 2 2 0 0 8

Q 3 2 0 0 8

Q 1 2 0 0 9

Q 2 2 0 0 9

Q 3 2 0 0 9

Q 1 2 0 1 0

Q 2 2 0 1 0

Q 3 2 0 1 0

Q 1 2 0 1 1

Q 2 2 0 1 1

Q 3 2 0 1 1

Q 1 2 0 1 2

Q 2 2 0 1 2

Q 3 2 0 1 2

Source: Thomson Reuters

Page 17: Bocconi Report

8/13/2019 Bocconi Report

http://slidepdf.com/reader/full/bocconi-report 17/30

In periods of market turmoil, we note a drop in stock valutations, while the yields onlong-term corporate bonds rose, especially for sub-investment grade rating class-es. 15 Higher uncertainty might then curb firms’ appetite for external growth, with theconditions for deal financing becoming less favorable. Consistent with our assertionin the previous section, that in periods of high volatility we expect to observe onlytransactions with a stronger rationale and more sound acquirers still going through.

Indeed, for firms that embark on M&A activity during periods of high volatilityregardless, we saw remarkable opportunities and some important distinctive ten-dencies. Figure 10 compares how much value is provided to shareholders, inexcess of the stock market index (i.e. ESTOXX 50), by transactions completedboth in quiet times and during periods of market turmoil.

We observe that deals undertaken in periods of high volatility deliver a higher medi-an excess return, and the differential increases over the time horizon. 16 This trendis confirmed if we confine our analysis to the sub-sample of only the transactionsfor the acquisition of a controlling stake in the target firm.

16

2013 M&A in Uncertain Times: Is There Still Value in Growing?

FIGURE 9 Volatility, European equity

market performanceand credit conditionsin Europe 2001-2012

15 A possible explanation for the lower sensitivity of the yield on investment grade bonds to expectations on volatility is that

the VSTOXX index indicates that volatility is expected to be high in the near future. Moreover, volatility is not expected

to stay high for long but to eventually revert to the mean. Short-term volatility is unlikely to affect significantly the long-term

probabili ty of default of more creditworthy firms, while for sub-investment grade firms this volatili ty is indeed relevantand drives shifts in yields.

16 The difference is statistically significant at 10% level based on the Rank Sum non-parametric test of hypothesis.

10%20%30%

40%50%60%

0%

Q 1 2 0 0 1

Q 2 2 0 0 1

Q 3 2 0 0 1

Q 4 2 0 0 1

Q 1 2 0 0 2

Q 2 2 0 0 2

Q 3 2 0 0 2

Q 4 2 0 0 2

Q 1 2 0 0 3

Q 2 2 0 0 3

Q 3 2 0 0 3

Q 4 2 0 0 3

Q 1 2 0 0 4

Q 2 2 0 0 4

Q 3 2 0 0 4

Q 4 2 0 0 4

Q 1 2 0 0 5

Q 2 2 0 0 5

Q 3 2 0 0 5

Q 4 2 0 0 5

Q 1 2 0 0 6

Q 2 2 0 0 6

Q 3 2 0 0 6

Q 4 2 0 0 6

Q 1 2 0 0 7

Q 2 2 0 0 7

Q 3 2 0 0 7

Q 4 2 0 0 7

Q 1 2 0 0 8

Q 2 2 0 0 8

Q 3 2 0 0 8

Q 4 2 0 0 8

Q 1 2 0 0 9

Q 2 2 0 0 9

Q 3 2 0 0 9

Q 4 2 0 0 9

Q 1 2 0 1 0

Q 2 2 0 1 0

Q 3 2 0 1 0

Q 4 2 0 1 0

Q 1 2 0 1 1

Q 3 2 0 1 1

Q 2 2 0 1 1

Q 4 2 0 1 1

Q 1 2 0 1 2

Q 2 2 0 1 2

Q 3 2 0 1 2

Q 4 2 0 1 2

Volatility − VSTOXX Index

1000

2000

3000

4000

5000

Q 1

2 0 0 1

Q 2

2 0 0 1

Q 3

2 0 0 1

Q 4

2 0 0 1

Q 1

2 0 0 2

Q 2

2 0 0 2

Q 3

2 0 0 2

Q 4

2 0 0 2

Q 1

2 0 0 3

Q 2

2 0 0 3

Q 3

2 0 0 3

Q 4

2 0 0 3

Q 1

2 0 0 4

Q 2

2 0 0 4

Q 3

2 0 0 4

Q 4

2 0 0 4

Q 1

2 0 0 5

Q 2

2 0 0 5

Q 3

2 0 0 5

Q 4

2 0 0 5

Q 1

2 0 0 6

Q 2

2 0 0 6

Q 3

2 0 0 6

Q 4

2 0 0 6

Q 1

2 0 0 7

Q 2

2 0 0 7

Q 3

2 0 0 7

Q 4

2 0 0 7

Q 1

2 0 0 8

Q 2

2 0 0 8

Q 3

2 0 0 8

Q 4

2 0 0 8

Q 1

2 0 0 9

Q 2

2 0 0 9

Q 3

2 0 0 9

Q 4

2 0 0 9

Q 1

2 0 1 0

Q 2

2 0 1 0

Q 3

2 0 1 0

Q 4

2 0 1 0

Q 1

2 0 1 1

Q 2

2 0 1 1

Q 3

2 0 1 1

Q 4

2 0 1 1

Q 1

2 0 1 2

Q 2

2 0 1 2

Q 3

2 0 1 2

Q 4

2 0 1 2

Equity Market − ESTOXX 50 Index

High Yield

Investment Grade0%

10%

5%

15%

20%

Q 1 2 0 0 1

Q 2 2 0 0 1

Q 3 2 0 0 1

Q 4 2 0 0 1

Q 1 2 0 0 2

Q 2 2 0 0 2

Q 3 2 0 0 2

Q 4 2 0 0 2

Q 1 2 0 0 3

Q 2 2 0 0 3

Q 3 2 0 0 3

Q 4 2 0 0 3

Q 1 2 0 0 4

Q 2 2 0 0 4

Q 3 2 0 0 4

Q 4 2 0 0 4

Q 1 2 0 0 5

Q 2 2 0 0 5

Q 3 2 0 0 5

Q 4 2 0 0 5

Q 1 2 0 0 6

Q 2 2 0 0 6

Q 3 2 0 0 6

Q 4 2 0 0 6

Q 1 2 0 0 7

Q 2 2 0 0 7

Q 3 2 0 0 7

Q 4 2 0 0 7

Q 1 2 0 0 8

Q 2 2 0 0 8

Q 3 2 0 0 8

Q 4 2 0 0 8

Q 1 2 0 0 9

Q 2 2 0 0 9

Q 3 2 0 0 9

Q 4 2 0 0 9

Q 1 2 0 1 0

Q 2 2 0 1 0

Q 3 2 0 1 0

Q 4 2 0 1 0

Q 1 2 0 1 1

Q 2 2 0 1 1

Q 3 2 0 1 1

Q 4 2 0 1 1

Q 1 2 0 1 2

Q 2 2 0 1 2

Q 3 2 0 1 2

Q 4 2 0 1 2

Credit Market − IBOXX 10+ Index

Source: Thomson Reuters

Page 18: Bocconi Report

8/13/2019 Bocconi Report

http://slidepdf.com/reader/full/bocconi-report 18/30

2013 M&A in Uncertain Times: Is There Still Value in Growing?

17

Still the question remains: Where does this value come from?

We have three potential explanations for value creation. We argue that the differ-ential in value created for shareholders may be determined by the extent to which

these three complementary explanations interact to shape transactions in toughtimes.

i) Different post-acquisition performance reflects systematic differences in dealsoriginated in different environments. This explanation is consistent, for example,with the argument that in tough times only more prudent transactions with astronger strategic fit are concluded.

ii) Return differentials are driven by specific characteristics of those companiescomfortable with making an acquisition during volatile times, and of their cho-sen targets. This argument indicates that in any case (also in turbulent times)relatively rich and high performing firms embark on M&A and possibly selectbetter targets.

iii) Better performance is the result of better deal execution. This third explanation,for example, points to a shift in bargaining power in times of high volatility, allow-ing bidders to negotiate more advantageous terms.

Let’s start from our first explanation and focus on how the transactions that origi-nate in volatile times differ from those in other periods. Figure 11 aggregates deals

2.13%

2.96%

0

1

2

3

4

5

6

M e

d i a n

E x c e s s

R e t u r n

( % )

High Volatility

90 Days

2.62%

5.34%

0

1

2

3

4

5

6

M e

d i a n E x c e s s

R e t u r n

( % )

High Volatility

180 Days

Source: Thomson Reuters

FIGURE 10 Acquirer post-announce-ment stock performance

Page 19: Bocconi Report

8/13/2019 Bocconi Report

http://slidepdf.com/reader/full/bocconi-report 19/30

with respect to the market conditions in which they occur and compares deal sizeacross groups. Mean and median sizes of transactions in periods of high volatilityare equivalent to those in more tranquil times. Similarly, other deal attributes, suchas the average percentage of ownership of the target that is acquired does not varywith increased volatility. The relative frequency of minority, majority and remainingstake acquisitions also remains unchanged, as well as the percentage of footholds.

On further inspection of deal characteristics, Figure 12 shows the relative frequen-cy of transaction attitudes in different periods and their corresponding fraction of aggregate deal value. Most of the deals are friendly both in volatile and tranquiltimes. Only very few transactions in our sample are hostile. Their aggregate dealvalue however is indeed relevant when volatility is mild, but it decreases dramatical-ly when volatility turns severe. Figure 12 also reports the geographic scope of thetransactions in the sample. While the relative frequency of domestic and cross-bor-der transactions does not change with volatility, the relevance of cross-border trans-actions in terms of aggregate deal value decreases significantly in volatile times. Thistrend is consistent with data from the Hogan Lovell survey according to which 56%of respondent companies forecast acquisitions in their domestic markets. Thisresult is in line with the argument that rising uncertainty can trigger protectionist bar-riers from foreign countries. Figure 12 also shows the relative frequency and theaggregate value of deals aimed at business diversification or specialization in peri-ods of high volatility; as is apparent, these figures are equivalent for the most partto those in more tranquil times. No clear trend is observable as far as the strategicscope of the transaction. Again, our evidence is consistent with data from theHogan Lovell survey according to which only about one-third of respondent com-panies consider the riskier idea of moving into new business sectors.

18

2013 M&A in Uncertain Times: Is There Still Value in Growing?

FIGURE 11Deal characteristics

conditional on marketconditions: deal sizeand ownership stake

0100

200300400500600700800900

1,0001,1001,200

M e a n

D e a

l V a

l u e

( M i l . U S $ )

High Volatility0

100

200300400500600700800900

1,0001,1001,200

M e

d i a n

D e a

l V a

l u e

( M i l . U S $ )

High Volatility

Deal Value

25% 51% 24%

25% 51% 24%

Minority Stake Control Stake

Ownership Stake

Remaining Stake

Source: Thomson Reuters

Page 20: Bocconi Report

8/13/2019 Bocconi Report

http://slidepdf.com/reader/full/bocconi-report 20/30

Page 21: Bocconi Report

8/13/2019 Bocconi Report

http://slidepdf.com/reader/full/bocconi-report 21/30

Again, on average, deals executed in times of turmoil do not seem to differ con-siderably from other deals along any dimension which can explain the excess valuedelivered by transactions in volatile times. On average, regardless of market con-ditions, acquirers in our sample differ significantly from matched inactive firms withrespect to their growth rate, their EV/EBITDA valuation multiple, and their EPS. Inparticular, statistical tests of the null hypothesis of equality of means across groupssuggests that, with respect to their inactive comparables, acquirers are character-ized by a faster growth rate of assets, higher earnings per share and a more gen-

20

2013 M&A in Uncertain Times: Is There Still Value in Growing?

TABLE 2Firm characteristics

conditional on M&A activity and market conditions

Source: Thomson Reuters

Panel a. AcquirersInactive Control Group Active Acquirers

All High Volatility All High Volatility (Mean) (Mean) (Mean) (Mean)

Total Assets ($ th.) 4,899,334.00 5,252,737.00 4,949,835.00 5,233,446.00Growth 0.11 0.10 0.13 0.13

Sales ($ th.) 2,616,459.00 2,788,685.00 2,662,378.00 2,843,775.00Growth 0.11 0.12 0.13 0.14

Price/Earnings 17.91 19.09 18.27 17.98EV/EBITDA 9.80 10.23 10.92 11.34M-To-B Value of Equity 2.09 2.13 2.09 2.04EPS 1.25 1.30 1.43 1.37ROE 0.10 0.10 0.11 0.11Cash ($ th.) 251,850.90 281,380.20 247,066.10 237,680.10Free Cash Flow ($ th.) 420,948.60 427,949.00 418,274.40 431,006.00

Leverage 0.25 0.26 0.24 0.24Interest Coverage 10.55 8.75 9.99 8.25

Asset Intangibility 0.67 0.68 0.65 0.66

Panel b. TargetsInactive Control Group Active Targets

All High Volatility All High Volatility (Mean) (Mean) (Mean) (Mean)

Total Assets ($ th.) 2,922,157.00 3,112,246.00 2,988,759.00 3,155,718.00Growth 0.10 0.14 0.08 0.10

Sales ($ th.) 1,662,310.00 1,805,841.00 1,726,818.00 1,852,457.00Growth 0.11 0.17 0.09 0.12

Price/Earnings 19.08 17.30 19.78 18.45EV/EBITDA 9.54 9.99 9.08 9.20M-To-B Value of Equity 1.98 1.88 2.02 1.98EPS 1.08 1.15 1.13 1.34ROE 0.10 0.09 0.09 0.10Cash ($ th.) 145,523.30 171,220.90 179,366.20 214,241.60Free Cash Flow ($ th.) 242,351.00 304,936.00 245,327.80 261,503.00Leverage 0.25 0.24 0.24 0.25Interest Coverage 11.96 9.13 8.87 9.47

Asset Intangibility 0.61 0.66 0.63 0.66

Page 22: Bocconi Report

8/13/2019 Bocconi Report

http://slidepdf.com/reader/full/bocconi-report 22/30

2013 M&A in Uncertain Times: Is There Still Value in Growing?

21

erous EV/EBITDA valuation multiple. Still, we do not find any significant differenceamong acquirers based on different market conditions. Targets in our sample dif-fer on average from matched inactive firms with respect to their growth rate andtheir profitability. Statistical tests of equality of means across groups suggest that,with respect to their inactive comparables, targets are characterized by a signifi-cantly slower growth rate of assets but higher earnings per share. When we com-pare targets conditional on market conditions, we find that those selected in toughtimes are growing at a significantly faster rate and gain significantly higher earningsper share. Overall, these slight differences do not seem to justify the higher valuecreated in transactions in tough times.

Finally, we turn to our third possible explanation, i.e. value is created in volatiletimes thanks to better deal execution. In Figure 13 we analyze the method of pay-ment while in Figure 14 we compare the premium paid with respect the target’sshare price one week prior to the announcement, and transaction multiples for

deals in quiet and volatile times.

While the relative frequency of different methods of payments seems unaffected bythe environment in which the transaction is originated, the aggregate deal value of cash transactions drops significantly in periods of turmoil. There are two mecha-nisms at work here. In general, while cash payment is relatively more frequent, itpotentially accounts for a lower share of aggregate deal value. This is consistentwith the fact that deals of greater materiality are more often settled in stock.Moreover, market turmoil magnifies this effect, as we observe that when volatility

0

10

20

30

40

50

6070

80

90

100

D e a

l N u m

b e r

( % )

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

0

10

20

30

40

50

60

70

80

90

100

D e a

l N u m

b e r

( % )

High Volatility

0

10

20

30

40

50

60

70

80

90

100

D e a

l V a l u e

( % )

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

Cash Mix Stock

0

10

20

30

40

50

60

70

80

90

100

D e a

l V a l u e

( % )

High Volatility

Cash Mix Stock

Source: Thomson Reuters

FIGURE 13Deal execution/negotiation:the method of payment

Page 23: Bocconi Report

8/13/2019 Bocconi Report

http://slidepdf.com/reader/full/bocconi-report 23/30

is high the fraction of the total deal volume paid in cash drops, while the frequen-cy is unaffected. We interpret this evidence arguing that rising uncertainty makesstock payments more attractive thanks to the benefits of risk-sharing from contin-gent pricing. This argument is stronger when deals are material, then we consis-tently saw only relatively smaller transactions being settled in cash during volatiletimes. An additional explanation could be that in periods of market turmoil, asshown in Figure 9 , raising large amounts of debt capital to finance cash acquisi-tions through debt is less attractive. Another possibility is that in this uncertain envi-ronment acquirers prudently prefer to hoard cash. Figure 9 also shows that equi-ty values are lower when volatility is high. Still, we expect stock valuations that areconditional upon market volatility not to prevent acquirers from using stock as pay-ment, as target shares may be even more undervalued. Or alterntively transactionsin volatile times may be driven by a stronger synergic rationale.

For a given valuation of a target, the choice of payment method and the bid pre-

mium are closely related. Academic research has documented that the bid premi-um is on average significantly higher in transactions settled in cash. This can beattributed to the fact that the acquirer would reap all the synergies from the deal,and because of the unfavorable tax treatment of target shareholders’ capital gains.Figure 14 compares bid premiums conditional on different methods of paymentand market conditions.

We observe consistently higher premiums paid in periods of market turmoil,regardless of the method of payment. However, while in relatively quiet times theprominence of premiums paid in cash over stock holds true, with market turmoilthe order is inverted: the average premium paid in stock transactions is higher thanthat paid in cash transactions. When uncertainty is high, the benefits of risk-shar-

22

2013 M&A in Uncertain Times: Is There Still Value in Growing?

FIGURE 14Deal execution/negotiation:

target valuationand the bid premium

13%

18%

0

5

10

15

20

25

30

M e d

i a n

( % )

High Volatility

OverallPremium

15%

19%

0

5

10

15

20

25

30

M e d

i a n

( % )

High Volatility

CashPremium

12%

25%

0

5

10

15

20

25

30

M e d

i a n

( % )

High Volatility

StockPremium

21

17

0

5

10

15

20

25

30

M e d

i a n

T r a n s a c t i o n

M u

l t i p l e

High Volatility

PE

1210

0

5

1 0

1 5

2 0

2 5

3 0

M e d i a n

T r a n s a c t i o n

M u

l t i p l e

High Volatility

EV/EBITDA

2 10

5

10

15

20

25

30

M e d i a n

T r a n s a c t i o n

M u

l t i p l e

High Volatility

EV/SALES

Source: Thomson Reuters

Page 24: Bocconi Report

8/13/2019 Bocconi Report

http://slidepdf.com/reader/full/bocconi-report 24/30

2013 M&A in Uncertain Times: Is There Still Value in Growing?

23

ing from contingent pricing make stock payments more attractive for acquirerswho, because of less obvious synergies, may offer higher premiums to induce tar-get shareholders to accept the transaction.

Figure 14 also reports average transaction multiples conditional on market condi-tions. We find that on average in periods of high volatility, even paying a higher pre-mium, acquirers are able to successfully complete the transaction at a compara-bly attractive valuation. Results are comparable across alternative transaction mul-tiples, namely PE, EV/EBITDA and EV/SALES. This trend reflects the promisingopportunities that arise in volatile times and the increased bargaining power of acquirers, which potentially translates into better execution and higher overall per-formance. Diligent negotiations might then partly explain the excess value createdby transactions executed during tough times.

If better execution is a driver of value for transactions in volatile times, the next step

is to expect repetitive acquirers to deliver on average better acquisitions, especial-ly in periods of turmoil. Figure 15 shows value to shareholders in deals classifiedby intensity of acquirer activity.

Consistent with the notion that execution is crucial, we observe overall that dealsundertaken by repetitive acquirers deliver increasing median excess return. Pastsuccess or a consistent track record of past acquisitions leads to better perform-ances. Still, focusing on transactions in volatile times, more experienced acquirersdo not seem to have a constant relative advantage. This evidence is consistentwith the notion that past success might be hard to replicate in transactions in a dif-ferent and more uncertain context.

1.73%2.61%

4.82%5.56%

123456789

10

M e

d i a n E x c e s s

R e t u r n

( % )

1 2 3 4+

Total Number of Deals per Acquirer

0.49%

5.79%

2.05%

7.05%

5.33%

1.26%

5.68%

3.80%

123456789

10

M e

d i a n

E x c e s s

R e t u r n

( % )

1 2 3 4+

Total Number of Deals per Acquirer

FIGURE 15Best practicesfrom replication:value creation conditionalon market conditions

Source: Thomson Reuters

Page 25: Bocconi Report

8/13/2019 Bocconi Report

http://slidepdf.com/reader/full/bocconi-report 25/30

Our analysis has shown that external growth can be a successful strategic moveeven in tough times, provided that certain conditions are met. In this spirit, the cur-rent climb in equity prices and the favorable borrowing conditions for deal closingcan indeed represent two important drivers of future deal flow. Managers lookingfor external growth and investment bankers acting as financial advisors can look at M&A with cautious optimism, in spite of the fact that uncertainty still character-izes negotiations on price and value.

In this context, and as documented in previous sections, pragmatism in deal nego-tiation and execution is crucial. Strategically defining the bid premium and themethod of payment, are key success factors for gaining the confidence necessaryto close a transaction. In particular, contingent payment methods might well be the

right device to bridge information asymmetry between buyer and seller. From theperspective of the acquirer, uncertainty predominantly reflects overpayment risk associated with overvaluation of the target. According to academic research 17 onnegotiating premiums and methods of payment conditional on acquirer and targetopacity, when deal materiality is high, stock payment is preferred for the acquisi-tion of opaque targets. However, in times of market turmoil uncertainty associatedwith synergies increases even more. In this case, event-driven contingent pay-ments, such as contingent value rights, warranties and earnouts, 18 are best suitedto address synergic uncertainty. On the other hand, for the target, uncertainty isrelated to assessing the value of the bid when stock is offered. Uncertainty on therealization of synergies makes it harder to detect bidder stock valuation, exposingtargets to the risk of realizing ex-post a lower value from the transaction. Also in

this case option-like instruments could become key success factors to overcomea target’s reluctance to close a deal in tough times.

Looking forward, how long is this window of opportunity going to last? Can weexpect financing conditions to remain as favorable as they are now? Aside fromthe lively ongoing debate regarding the next shifts in monetary policy, the discus-sion is intensifying on whether and how the implementation of the new restrictionsimposed under Basel III would affect M&A activity by tightening credit or hamper-ing economic recovery.

24

Looking Ahead

2013 M&A in Uncertain Times: Is There Still Value in Growing?

17 Chiarella, C. and Gatti, S. (2012), How Much to Pay, and How, for Opacity? Negotiating Premiums and Method

of Payment in M&A, Working Paper, Università Bocconi, December.18 Battauz A., Gatti, S., Prencipe A. and Luca Viarengo (2012), Earnouts: The real value of disagreement in mergers

and acquisitions, Università Bocconi, Working Paper.

Page 26: Bocconi Report

8/13/2019 Bocconi Report

http://slidepdf.com/reader/full/bocconi-report 26/30

25

2013 M&A in Uncertain Times: Is There Still Value in Growing?

Notes

Page 27: Bocconi Report

8/13/2019 Bocconi Report

http://slidepdf.com/reader/full/bocconi-report 27/30

Page 28: Bocconi Report

8/13/2019 Bocconi Report

http://slidepdf.com/reader/full/bocconi-report 28/30

27

2013 M&A in Uncertain Times: Is There Still Value in Growing?

Notes

Page 29: Bocconi Report

8/13/2019 Bocconi Report

http://slidepdf.com/reader/full/bocconi-report 29/30

Page 30: Bocconi Report

8/13/2019 Bocconi Report

http://slidepdf.com/reader/full/bocconi-report 30/30